What would be a fair compensation to advisor for pre seed startup and still pre revenue?
As for example one advisor ask for equity and commission from successful fund raising that through him, what would be fair number for both?
It is illegal to take (or give) success fees in the US unless you are an SEC registered dealer broker. To see more on fair compensation for advisory board members, look at http://a2e.co/ under Articles...
2017-06: Advisory Boards - Fair Compensation?
Further to Fred's comment - there might be some legal challenges around giving a commission for the deal if they aren't registered.
As far as equity goes - 5% seems insanely large for a mere introduction, even if it results in closing financing. Equity for employees is provided to incentivise them to produce quality work in lieu of a larger salary. Companies often introduce a cliff associated with the equity as well to ensure that employees are incentivised over a longer period.
Given that you'll give early employees between 2 and 5% with a 3 year cliff, the idea of giving out 5% for a single transaction (that's not the VC themselves) seems very high to me.
Most in this response are misusing the word commission. Fred is correct that you can not structure a finder’s fee unless you are a registered broker. The penalties by the SEC include steep fines as well as nullification of the entire deal in transaction. However, a commission which is usually used to define a % for a contracted employee is a different matter. There are ways around the finder’s fee issue if you are employing the individual at your company, as opposed to a true broker of deals that works on finder’s fees or one time deals. As always talk to your lawyer first. Unfortunately, way too many people use finder’s fees illegally and often out of ignorance to the law. But ignorance is never an acceptable defense in court, so no point to risk it.
In general 1-3% is what it used to be for more established investment deals, but with money hard to come by and being a start up, 5% is normal and I have seen as high as 10%. At the end of the day 95% of your funding or 90% of your funding is much better than 100% of nothing. As for advisors, generally 1-2% is acceptable, again depending on their role. I have friends who have made millions in the long run on 1% so don’t think its nothing.
Harrison makes some good points to think about. As for finder's not delivering, while I have been there and it stinks, ultimately blame yourself. And I say that having been there and done that in my early twenties. You have to do due diligence. In most cases, you will figure out very quickly if you are experienced and if the person can deliver. There are plenty who will deceive. First verify they are a registered broker. This will ward off many. Second, ask them to provide a few deals they have completed as finders. I like his thoughts on equity, but he, like me appears to be strategist. I can get an entrepreneur at the table of high net worth individuals all day long. Yes that apparently is difficult for a lot of entrepreneurs who are either too lazy or incapable of that process. (this second understandable, the first is not) After about the third time of doing this and watching an inexperienced communicator/businessman/entrepreneur completely ruin the potential deal/collaboration I said no way..never again. I can help grow a company and it means nothing to me to hand over a startup to an investor only to watch them completely scuttle the deal through lack of experience. And at the same time, in most cases the upfront fee is not where the money is. BUT, I will say I disagree that the introduction alone is only worth a bottle of wine. On the one hand...yes..if you are willing to gain intro yourself. BUT, if you are not...then it is absurd to suggest someone connecting your company to a high profile advisor or investor is only worth a bottle of wine. As I alluded, I know guys who get equity for making one or two phone calls that based on their reputation lead to deals worth either a great deal of investment, or a collaboration worth a great deal. Now if it was someone with no relationship to the investors or advisors...yeh..don't pay them to go through a google search.
It depends what kind of "advisor" we are talking about, and how much of a role they take in fundraising. If you're talking about a standard "advisory board" member, who may have a fairly superficial and sporadic involvement and work load, then yes, a lower equity number is normal, and introducing you to an investor should normally not incur a huge extra intro fee (if any!)
If on the other hand, someone is actively advising you on your fundraising, putting together materials, taking a lead role in the marketing, approaching investors, helping with legals, effectively acting as a fundraising agent, doing some of that work, then 5% commission is very usual, can even be higher if you are raising a smaller quantity of funds. Subject of course to the SEC rules others mentioned.
Hope that helps.
There is really not a set % as this depends on what real value it adds to your business. For e.g.
1. Equity 5%: If you value your company at say $400k pre-money and raising a $100k pre seed round i.e. $500k post-money valuation; 5% equates to $25k worth of work/ time already - which is a lot for only $100k hitting your bank
2. If you offer a % of deal value in US you need check the SEC rules as pointed out.
I usually prefer to offer a 5% commission on actual sales generated and bootstrap company till products get ready for sales. You can also explore grants till that point. Just my 2 cents.
Some benchmarks to consider...
Investment banks get 6% to 7% for getting deeply involved and doing all of the work associated with an IPO so you might want to consider that when determining an appropriate percentage, especially for just an introduction.
Anyone who regularly takes compensation for raising capital must indeed follow securities regulations in the US but the person does not absolutely need to be part of a registered broker/dealer. However if you are coupling the award directly and solely to the capital raise this is extremely difficult to do without a broker/dealer involved.
5% is about right
@Paul Henderson, 5% on the equity option or commission from successful fund raising?